United’s Clever Move to Be Competitive While Obeying Scope with the CRJ550

United put out a press release yesterday touting a big increase in the number of premium seats onboard its aircraft. Some of this (like adding a row to the A319/A320 fleet) is all about being competitive with similar aircraft at American and Delta. But changes on the regional side of the equation aren’t as easy to make thanks to restrictions in the airline’s pilot agreement. So what did United do? It got quite clever and introduced the CRJ550. In the short-term, I get this, but in the long run? It seems like there has to be a better way.

What United has decided to do is take 20 of its contracted CRJ700 aircraft that today seat between 66 and 70 seats and shrink those down to hold only 50 seats. If this sounds like madness, it is. But there is a calculated rationale behind it. And it all goes back to scope.

Airlines in the US have agreements with their pilots about how many aircraft they can outsource to regional partners with 76 seats or fewer. This restriction is called the “scope clause,” and I’ve written about it previously so I won’t rehash things here except for what’s necessary.

American has the least restrictive scope clause because it grows with the total fleet. The airline can outsource two 51 to 76-seaters for every five mainline aircraft it operates. Meanwhile, United and Delta have identical scope clauses that put hard limits on the number of aircraft with 70- and 76- seats, but they use them differently. Since Delta opted to add 88 small mainline jets (originally the 717, now the A220), it can have 70 more 76-seaters than United. So, in the current state of the industry, United has fewer desirable big regional jets than either Delta or American.

Where United does have flexibility is down in the land of 50-seat aircraft. It has been growing in small cities a lot lately, so it has been adding 50-seat flying like crazy. There are three problems with 50-seaters. First, they are old and new ones aren’t being made. Second, they are awful for passengers. The small cabins mean that they can only be efficiently operated in all-coach configurations plus the overhead bins are so tiny that they can barely hold anything. Third, without an Economy Plus and First Class cabin, these machines can’t generate the kind of revenue that United could otherwise earn. United’s ability to gain its “fair share” is also made much more difficult without these customer-pleasing cabins.

Delta has solved for this problem by upgauging. It has those 110-seat mainline aircraft which can serve markets that were operated by 76-seaters. Then everything else moves up the chain, leaving a small number of 50-seaters in the Delta fleet to work the smallest and shortest of routes where First Class isn’t as important and anything bigger wouldn’t be economical. American, meanwhile, can add more of the 76-seaters, so it is able to work toward a similar goal. Where does that leave United?

You can look at any number of markets to see just how bad things are from a competitive perspective, but let’s start with Chicago where United and American go head-to-head. For example:

Chicago to:

United

American

single-cabin flights

three-cabin flights

single-cabin flights

three-cabin flights

St Louis

6

2

1

5

NW Arkansas

3

0

0

4

Tulsa

4

0

0

3

If you’re a Chicago-based frequent flier that goes to these cities, who are you going to fly? You get free Main Cabin Extra on American, but on United it’s not even an option to get Economy Plus, let alone First Class. It’s a big competitive disadvantage.

This explains why United wants scope relief. It thinks it needs to put more three-cabin airplanes on competitive routes. The pilots, however, have said, “Hey United, you already have two options. Buy small mainline jets for us and you can outsource more, or let us fly the regional jets ourselves.” United so far hasn’t been interested in either option.

This squeeze has caused United to start doing inefficient things. It placed an order last year for the Embraer 175SC. That’s basically an Embraer 175 with only 70 seats onboard instead of 76. United has already hit its cap of 70-seaters at 102, so I figured this order would replace older aircraft. That appears to be wrong.

Instead, United is going to take 20 of the CRJ700s that had between 66 and 70 seats and convert those into the new CRJ550. It’s the same airplane, but it’s just capped at 50 seats. I call this the “Great Lakes Strategy.”

Yes, it’ll be more expensive to fly a CRJ700 with only 50 seats onboard, but United doesn’t really have another good option to get three-cabin airplanes into those smaller markets right now.

The CRJ550 will, unsurprisingly, go into Chicago markets first followed by Newark. United will instantly become competitive with American on routes where today it simply isn’t. Is it inefficient to fly those bigger airplanes with only 50 seats? You bet it is. Just take a look at this seat map:

That’s four separate closets you see on that airplane to give people places for full-size carry-ons. There’s also a galley and little bar area for First Class passengers. It’s all pretty silly, actually, but in the short run, this seems like a quick and dirty way to be able to compete for traveler affections. As long as the economy remains good, I can see this configuration working.

All that being said, I would much rather see an extra 20 seats on this airplane from a profitability perspective. I’m sure United would as well.

If this is a long-term strategy, then I think it’s short-sighted. United needs to grow into smaller mainline aircraft at some point and that should provide some scope relief. But even beyond that, can United really make the argument that flying a 70-seat aircraft with a mainline pilot isn’t better economically than having a regional pilot fly the same plane with 50 seats? I can understand it (marginally) with the 6-seat spread on the Embraer 175SC, but this is whole different ballgame. The pilots must know that they’re in a pretty good place from a negotiating perspective for the next contract. Scope changes will undoubtedly be at the top of the list to discuss.

In the meantime, this is great news for those who fly United. Enjoy the luxurious configuration while you can get it. The only loser in the short-term is American since it just picked up a a lot of new competition in markets where it previously had the upper hand. Good for United for doing something creative here, even if it’s just creativity to close the gap with the others. Whether it makes sense or not, it shows some real outside-the-box thinking, and that’s the kind of thinking United needs.

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What is sad is the levels to which UAL management will go in order to not buy a small mainline aircraft or shift some of the large regional aircraft to mainline. They could easily do either one and probably add a few more seats on the E175s which would easily pay for the higher United mainline labor costs compared to the 70 seat version.

Looking at the 550, the onboard closets are nice but it will be chaos trying to deplane. And what person sitting on the window seat (1/3 of the passengers) is going to climb over their seat mate to go get a drink on a flight that could be shorter than current CR7 flights because United’s pilot contract which also limits the takeoff weight of 50 seaters, meaning two hour flights are probably about as far as the plane will be able to fly after factoring in taxi delays at Newark and Chicago. The whole point of first class is to be served. Walk up bars on long international flights are there as much for a place to stretch and standup, something not necessary on short domestic flights.

Considering that AA, DL and UA’s own current CR7 configurations offer more premium seats (extra leg room coach plus first class), this is a recipe to force regional carrier unit costs up and has nothing to do with adding more premium seats on the CR7 but rather keeping as many regional aircraft in UAL’s marketed fleet as possible.

And then finally, you have the labor piece; UAL has been touting improved labor relations with its employees. This is a dagger to the heart of UAL employees in making clear that UAL would rather operate dozens of inefficient outsourced aircraft rather than grow the ranks of UAL employees with more mainline operated aircraft. You can bet that the notion that these aircraft might be converted back to a 70 seat configuration (or close) at some point in the future will be summarily squashed during pilot negotiations. The fact that UAL has signed a 10 year agreement with one of the weaker regional operators shows this is not a short-term strategy and even if UAL intends it to be, there will be significant costs to end the program early.

Continental’s excessive reliance on 50 seat aircraft flying long routes was one of their Achilles’ heels and UAL has done little to demonstrate that they want to permanently remove that vulnerability.

Every airline that intends to be around has mainline aircraft on order – because they will have to retire some aircraft. And UA will grow its mainline fleet but that doesn’t mean this large RJ in a small RJ body strategy doesn’t limit mainline growth – because it does.

I am sure the flight attendant will do service; but again, we are talking fairly short flights so a snack bar is either something just to fill up space or means the service levels are expected to be reduced.

I haven’t seen any confirmation but I am not at all sure that these aircraft will have two FAs. Again, the number of premium seats on these aircraft will be within a few of what is currently offered on existing CR7s for UA or other airlines. This strategy is not about adding more premium seats to existing aircraft but rather about increasing the number of regional aircraft UA can fly.

and the real issue is that UA doesn’t want to upgrade to more economical two cabin aircraft and upguage existing two cabin regional jets to mainline as Delta is doing. Both have the same scope rules but Delta has more large regional aircraft available because it added small mainline aircraft – and starts service today with the A220, 40 or so of which will be nearly identical in size to the 717. The reality is that Delta has structured its network and its hubs so that 110 seat aircraft work in many places. It is hard to believe that UA couldn’t do the same thing if it wanted. Same for American – they just have a greater ability to use large RJs.

Delta is shrinking its regional jet fleet; American and United are growing theirs.

I am certain that Delta’s cost to produce a seat mile in the under 125 (737-700 or A319 category) is far lower than United and that gap will grow. When United says it intends to compete for more high end business traffic with a product that cannot be competitive on a cost basis with other airlines, you cannot realistically believe that United will close its margin gap with Delta, which is something they have said they want to do.

you know what’s tragic ? DL loyalists taking both sides of every coin … just like in SEA KIX debacle. 8 months ago, no matter how ridiculous their reasoning sounds, they would resort to “delta is profitable so they’re smarter than you” …. fast forward just barely 8 months lately, and already now blaming everyone else for SEA KIX woes.

but then again, we’re talking about an airline that doesn’t know how to fly between the top 2 metros globally with the most high net-worth individuals (NYC and TYO), and doesn’t know how to fly to the metro with THE most ultra HNW folks in the world on their own metal (HKG)

always thumping on how they’re the premium and premier carrier, and yet falls completely flat with it comes to cities with actual premium demand … reality must sucks for those who have never seen what an actual metro with premium demand looks like.

I’m not sure why you feel a need to drag Asia into the discussion but since you did, let’s get a few facts straight. And since I am the only one who mentioned Delta in comments above yours, I’ll assume your comment is addressed to me even though you mixed in a number of other issues which I didn’t even raise.

As for New York to Tokyo, you apparently choose to pretend the whole opening of Haneda and joint ventures don’t matter. They clearly do which is why Delta has been able to rapidly grow its presence in Seoul while maintaining a strong position in Tokyo with 7 gateways to both Tokyo airports. Just for a point of reference, American is operating from just 2 US cities to Japan on a daily basis.
Delta has an application with the DOT to add its 5th gateway to Shanghai which would make it with the most US gateways to China’s financial center than any other US airline.

Delta is far more profitable across the Pacific than United. Check out DOT data here.

As for the argument that airlines can allocate revenue and costs how they want, the DOT consolidates and releases what the airlines report.
The totals add up to the same. United is less profitable in the Pacific and in other regions. Delta is clearly more focused on running a more profitable business than United.

Rather than bringing in a lot of side arguments that are far beyond the scope of this discussion, can you not consider that the reason why multiple people – above and below your post – question UA’s decision is because there are many examples from the past and future to see why UA is not choosing the best financial or human relations solution.

and UA’s CR550 solution is sub-optimal to both AA and DL as part of their regional jet strategies; AA just hasn’t also chosen to add a small mainline aircraft.

1. Most likely one FA instead of two
2. Easier carry on handling
3. Need for 50 seat aircraft and no reasonable replacements out there
4. Low capital cost for acquiring the aircraft vs 10-15% fuel burn difference
5. Corporate contract negotiating power they have previously lost
6. Higher satisfaction for frequent flyers
7. If it works well, can expand across the network as long term replacement plan for ERJ 145’s and CRJ200’s.
8. Hopefully frees up a few aircraft to start adding feed into IAD.

Any time you have fewer seats than what can be placed on a plane, it will mean less revenue per flight unless you can get a premium on those fewer seats. I really find it difficult to believe that any airline can get 70 seats worth of revenue with only 50 seats especially on a short haul flight.

This UA announcement brought a smile to my face as I recalled the Avro RJs flown by NW and, for a very short time by DL. They were really the BAE-100 reconfigured from its intended 125-130 seat capacity down to 75 or 85 seats (I forget which). This was used on 350-1000 mile hops and was a favorite of this business flyer.
All elites plus anyone who smiled nicely at the Gate Agent was upgraded to a first class section that stretched nearly as far as the eye could see when entering the airplane. When seated after work in a comfortable first class seat with 40 inches of seat pitch and a drink in hand, who cared about the troubles of the day. That thousand plus mile trip from MEM-LGA was made a pleaure even thoug one was sitting in that noisy old Avro RJ rattletrap.
This is not much different from that as UA is putting lipstick on their Canadian pigs in order to attract flyers who are easily seduced by that sort of trollope. Delta saw very quickly that it was a losing proposition and so will UA.

It’s been 10 years, your memory has gotten cloudy. NW flew the RJ85 (not a BAE-100) with 69 seats (not 75 or 85). The name RJ85 referred to the intended seating config (85, not 125-130). The first class section had 12 seats (same as a Embraer 175 today). NW parked the planes shortly after filing Ch11. They pushed Mesaba (who flew the RJ85) into bankruptcy shortly thereafter. During bankruptcy, NW reached an agreement with their pilots, and created Compass Airlines to fly the Embraer 175. The RJ85s were parked before NW emerged from CH11, and long before the merger with DL. The RJ85 was long gone before the merger was even announced. chris

I despise, “hate” perhaps is a little strong, UA’s excessive (my word) use of contracted-out regional service, except, except, except, for that local, or connecting smaller/lessor traffic communities to/from hubs, those occasional off-peak, frequency-purpose, fill-in flights, or that tag-along or tail-end service that isn’t large enough to justify continuing mainliner service. I despise contracted-out/operated in lieu of type service because of the smaller aircraft, crammed cabins, less overhead space, and what I view is lesser quantity of onboard service and quality with which cabins are being maintained. I question that these airlines meet the same financial, experience, pay level standards of UA itself. “Customer-focused,” NO!

I read about this yesterday and did a fair bit of head scratching over this move with the RJ’s. Thank you Cranky for breaking it down. I’m still perplexed on the move. As a frequent DL traveler I’ve been on several 717’s over the past couple years. When DL bought those I was thinking why but now that I’ve been traveling on them, and not a RJ, all I can say is “I get it.” I get that UA wants to do something quick but in all honesty a massive order for the A220 would be more impressive. This is a band-aid that will fall off.

+1 on “United needs to get over themselves and grab some A220s”. As mentioned, DL has figured out how to make that size of plane work…AUS for example relies on 717s for MSP and DTW flights, and I imagine they’ll be throwing A220-100s into the mix as soon as there are enough to sufficiently invade other carriers’ hubs.

With all that said, I don’t mind RJs…as long as they’re E-Jets. I’ll take an E75 over a 737 all else equal. But I haven’t flown on a CRJ in nearly eight years if memory serves, and I’m perfectly happy keeping it that way. Though I suppose a CR7 is preferabble to an E45, no matter how many seats is on the former.

Swinter – What he said. It’s just a CRJ700 but they had to take down the weight, so that’s technically a new type, I guess. That’s a paper change, so these airplanes are really just getting new interiors.

That seems like an important distinction to me. If Bombardier is offering to extend the life (physical or practical) of its existing birds with this move (a la the 737 COMBI program or the MD-10 program), that would be an entirely different value proposition and market strategy than attempting to grow in the market (which is what their release appears to be positioning this move to be).

To CF’s original point, the current 50-seaters “are old and new ones aren’t being made.” So, is this an attempt to address that problem by making them, or a patch to solve a scope problem for United? I suppose we don’t yet know, but that’s the most curious question here to me.

Easy solution, have the mainline pilots fly the Embraer 175 and have the regional guys do 50 seats or less. Creating more jobs at mainline United and helping with the pilot shortage from a career perspective of a future pilot deciding on the career. The passenger is going to pay for this as it will be a higher price ticket for a short flight to pay for those 550’s. Greed at it’s best.

*facepalm*
What are you doing, Scott and Oscar?
Get some 220s. If you don’t want to pay new aircraft costs, get some more 737-700s or 319s. United already has the highest proportion of regional flights compared to AA and DL and now it wants more? Do they…do they not like money? Because this is how you not make money.

Am I missing something? The refurbished planes are less economical to fly, but that loss will be made up by the ability to sell first and prem eco seats on flights that are 30 to 45 minutes long? And having this option will magically peel people away from American who already has this option?

I would think that most of these flights are feeder flights. If you’re a United loyalist, you’ll fly them anyway, even if you have to sit in economy for 30-45 minutes to connect to your biz class or prem Econ class seat on your mainline United flight. You wouldn’t book two tickets on two different airlines, i.e. American on the short hop and United on the next, longer flight, because of hassles involved.

And if you’re an American loyalist, you wouldn’t switch to UA regardless of the offering.

So why is this an idea that makes UA more competitive? I guess time will tell if the CRJ550 is a sound business decision or a “keeping up with the Joneses” mistake.

Malbarda – I think you’re looking at flights a lot longer than 30 to 45 minutes. Take Chicago to NW Arkansas as a perfect example. That’s Wal Mart country, so it’s a big business market. It’s also just shy of a 2 hour block time. Or even more than that, take this example of a market I didn’t even use in the post: NY to St Louis. The flight is under 900 miles with a 3 hour block time and it’s flown by 4 daily 50-seaters now. Delta and American have bigger airplanes from LGA These are markets where there is real opportunity to shift share.

Beyond that, remember, United already ordered some of the Embraer 175SC airplanes to fill the 70-seat category. It already has the max of 102 airplanes in that category, so at least some of these CRJ700s would have to be kicked out of the fleet if not converted to 50 seaters.

Cranky: I get your point that longer segments are included. But I am still not clear on the economics of this. The option for UA to sell more profitable seats should compensate for (a) fewer seats and (b) a less economical cost of flying (the plane itself)? And all of this because UA can now pull premium pax away from competitors who already offered these services (with more economically viable planes flying the route)?

I’m guessing AA could perhaps lower prices a bit on their premium offerings on the same route, as their planes are more economical. And that would make it even harder for UA to make this plane “work”. As I said, time will tell…

malbarda – Remember the option for UA to sell more profitable seats doesn’t compensate for fewer seats. UA can’t add more 70 and 76 seat airplanes, so it has to be served by a 50 seater short of adding mainline. So assume these routes will be served by 50 seaters no matter what. Can UA make more money by flying 3 classes on a plane built for 70 seats vs flying 1 class on a plane built for 50? That’s the bet that they’re making, and I tend to think it’s probably an easy win right now.

There are lots of seat-miles flown and dollars paid by people who are either a) neither United nor American loyalists or b) fly so often that they are both United and American loyalists, especially in Chicago. United should try to be competitive for those groups. Plus they want people to be United loyalists, and having an inferior product to American (an impressive achievement in itself!) is not a good way to make people United loyalists. And frequent flyers based in small outstations who have to connect through ORD every trip can be lucrative (one example: MSN-based Epic consultants, in addition to Cranky’s Wal Mart employees), and if they have the choice of flying a 50 seat CRJ-200 or a more comfortable ERJ-175/CRJ-700/CRJ-550 every feeder flight, they’ll go for the latter.

United pilots have no reason to give up their jobs in such relatively good economic times. United-ALPA need only hold a firm position across this and another contract cycles for inflationary monitory policy to force United acquisition of a mainline small narrow body.

A question: With the self-serve bar in the front, and a minimal F/Y divider, whats gonna keep E+ folks from wandering up to fix themselves a scotch and soda while the sole FA is handing out pretzels in the E- section? Life is good!